3 Upshots of US Tariffs

The image above I am sure you will recognise is Ben Stiller in the movie Zoolander giving his “Blue Steel” facial expression. Every time I hear or read about these proposed steel and aluminium tariffs I am not sure why I do but I think of blue steel.

Tariffs simply stop the benefits generated by countries and companies with competitive advantages as-a-result of their economies of scale. So, they can be particularly harmful and they contain a negative vibe with what is essentially a short-sighted tax.

Trade War or Military War
The first consequence is the potential for a trade war with other nations imposing tariffs on goods imported into their country from the USA. If retaliation tariffs are imposed by other countries creating a trade war the net effect is that no one will benefit.

Perhaps Donald Trump is taking this first step with a view towards not creating a trade war but some kind of military war.

Inflation
The proposed 25% tariff on steel and 10% tariff on aluminium imported into the USA will simply increase prices of these commodities. And, it will lead to higher prices on the entire product life cycle from the raw material through to the finished products that businesses and consumers purchase.

It is an interesting time to be adding to prices and therefore to inflation in the US. Reason being is that inflation has been increasing since 2016 as per this chart of US 10 year bond prices. Bond yields have been rising since which is reflected in bond prices falling per this chart.

The Reserve Bank of Australia would be happy with this tariff turn of events as the RBA has less pressure to increase the Australian cash rate. Global inflation forces will mean Australia’s big banks will face increased funding pressure from overseas and at some point be likely to pass on this additional funding cost to their customers (mortgage holders).

So, tariffs are bad news if you have a mortgage and conversely good news for those who invest a portion of their money in term deposits.

Old School and Inefficient
This tariff move is a very old school one and for that reason surprising to me. Tariffs are about protecting jobs in America. I read today that in 1980, it took 10-man hours to produce one tonne of US steel. Today it takes less than 2-man hours meaning that no tariff can bring back the jobs lost to productivity.

All the tariffs will do is create an environment for US workers to be that bit more inefficient. That is the surprising part, why try to protect an inefficient industry compared to global peers when the economy is becoming dominated by technological innovation in which America has a competitive advantage?

Silver Lining
I read today that these tariffs have to be discussed and ratified by US Congress so it is not a done deal. If it goes through, the upshot is that it is unlikely to end well for the majority.

Summing it Up
Potentially setting up a trade war to protect the jobs of a small number of American workers employed in a low-tech industry makes no sense.

And, adding to already increasing inflation doesn’t either.

There is something bigger going on and it is what is not being said that is really at play here…

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